Many households run into financial disaster as a result of factors that can be prevented. This may happen during stable financial times but is always more sever during times of recessions.

This article provides more information about the ten most common failings of households that contributes to financial disaster. The information is intended to provide the reader with help to gain knowledge about these 10 areas contributing to financial disasters for households.

1. Control Activities in your Household

The key to success is to ensure that you know what is happening in your household. In this regard it is important to look at activities that directly requires funds as well as the activities that indirectly requires cash.

In order to track the activities the following is important:

Accurately record all expenses and back it up with original receipts. Compare actual expenses with budgeted expenses. Review cash flow information in a timely manner and at regular intervals. Take corrective action as soon as deviations are identified.

2. Set Realistic Financial Goals & Stick to them

The primary goal should be to prevent financial disaster at all cost. It is important to keep this goal in mind at all times. This may require a temporary change in lifestyle or the sacrifice of a new acquisition.

The importance of knowing how much cash is available at all times is one of the primary success factors in preventing financial disaster. If you know in advance that there will be a cash flow shortage some time into the future you can plan for that before it occurs and prevent any negative impact.

In order to know how much money is available and at what time there will be a shortage can be achieved by managing the cash position and forecast your cash flows on a regular basis.

4. Time payments according to your cash flow plan

To prevent financial disaster it is critical to treat your creditors and debtors with respect. The true sign of respect is to make payments on the time agreed to and to expect to receive payment from your creditors on the agreed time.

Always avoid late payment of statutory payments such as government rates and taxes.

If you forecast a shortage of cash it may be a solution to make some payments to your creditors a bit later than usual, but this should only be none with prior arrangement with the debtor. At the same time you could approach your debtors and request earlier payment from them.

It is important to always have a good relationship with your banker. It is not only big businessmen who should have regular meetings with their bank. You should build up a good relationship with the bank official in good times and this will stand you in good stead when you need their assistance to improve your cash flow position.

5. Communicate

To prevent financial disaster one of the most critical aspects are to communicate. Communication with your family, your debtors, your creditors and your bank is all equally important.

Communication goes beyond talking to somebody, sometimes it is necessary to have formal meetings, write letters and emails and make telephone calls. In some cases it is essential to have a record of the communication and in these cases therefore verbal communication should be followed up with a written record.

It is wise to have a structured approach to your communications. To achieve this you should organize yourself to:

Arrange regular meetings with your family to discuss financial matters in an open and honest manner. Attend meetings with your bank, creditors as well as debtors to discuss financial matters. During meetings follow an agenda and work in a constructive manner to solve potential financial problems. Keep a written record of all meetings and ensure that action items are recorded, allocated to specific individuals and follow up times agreed upon.

6. Re-evaluate Expenses Regularly

It is important to evaluate and re-evaluate expenses on a regular basis. When a decision is made to incur a particular cost it may be the appropriate decision at the time, however as circumstances change so may the necessity of a particular expense.

It is important to review and benchmark your expenses and financial commitment to avoid:

Unnecessary expenses that does not add value. Financial commitments that duplicate and that constitutes a waste. Combine expense commitments that could save money wherever possible.

7. Involve your Family

As stated previously you should involve you whole family in the decision making relating to your household financial activities. This should include discussions about income and expenses.

The income side is normally quite fixed as it normalcy constitutes of salary and wages. On the expense side your family and you should consider both short term and long term financial commitments. Some commitments could be pure expenses and others could be long term financial planning items.

8. Relationship building

Ensuring that you have good relationships with both your debtors and your creditors are critical to avoid financial disaster.

During a financial hiccup such that can negatively impact upon your financial commitments, an agreement with the creditors may prevent a complete financial meltdown. An acceptable agreement with your debtors will include a short, medium and long term component that will meet the needs and expectations of both parties.

9. Provide an adequate cash flow structure

As a result of changing circumstances you may require additional funding to maintain your financial commitments.

It is essential to ensure that there is always a plan in place to deal with a change in external cash required to service existing financial commitments. It may be necessary to capitalize on your ability to raise long term funds, to prepare for financial stability and long term commitments.

Consider the following potential sources of funds:

Try to increase your cash inflow by working overtime or taking up a second job. Reschedule payments on long term assets such as you house. Sell unnecessary items that place pressure your short term cash, especially items that requires monthly payments. Consolidate your debt with the lowest interest rate debt supplier. Do not make new debt.

10. If all else Fails seek Expert Help

If you are unable to resolve your problems quickly it is important to look for assistance. You should act decisively and quickly before your financial position turns into a financial disaster. Most banks and some other financial institutions will be more than willing to work out a solution if you approach then in time.

Conclusion

The best way to prevent financial disaster is to limit your financial commitments to a level where you will not run out of cash. In other words prevention is better than cure. One way of achieving this is to draw up a cash flow forecasts. For more information about this read my ezine article on this topic.